The Facts About IPERS

because facts matter

The Iowa Public Retirement System (IPERS) has a micro-website called “The Truth About IPERS.” The site provides good information; however, it is incomplete. “The Facts About IPERS” is intended as supplementary information and will therefore provide a more complete picture of the status of Iowa’s largest public retirement plan.

“1 in 10 Iowans is a member of IPERS.”

FACT: Many Iowans do directly benefit from IPERS. But truly, IPERS affects nearly all Iowans because all taxpayers help pay for the system. Today’s total contributions are $1.2 billion per year, with taxpayers covering 60% of that sum. Indeed, all Iowans should understand the facts about IPERS. Ninety percent of Iowans are paying for the 10% who enjoy the benefits of membership.

FACT: Investment income is counted on to pay benefits. However, if the assumed investment income does not materialize, or worse, if part of the investment principal is lost (as happened in 2009), taxpayers must make up the difference. In truth, because it depends so much on investment income, the plan carries enormous risk. Contribution rates have already gone up 66% in the last 10 years in order to begin to compensate for past investment losses and underperformance.

Even with a large shortfall, IPERS has a payment plan in place to be fully funded in 30 years.

TRUE, but only if all the assumptions are right and Iowans are comfortable in asking their grandchildren to help pay for operating costs that were incurred before they were even born. The “shortfall” is nearly $7 billion now, so the plan’s assumptions and models have not worked well in the past. The model assumes an average annual seven percent return on investment for the next 30 years. [Read More]

“THE PUBLIC RETIREMENT SYSTEMS COMMITTEE (PRSC) IS CHARGED WITH REVIEWING AND EVALUATING IOWA’S PUBLIC RETIREMENT SYSTEMS. SOME COMMITTEE MEMBERS ARE CONCERNED ABOUT THE SHORTFALL AND ARE STUDYING POSSIBLE Changes to the plan.

The PRSC should be concerned about the shortfall. IPERS has $7 billion in unfunded liabilities. It is a contractual obligation that must be met in order to pay benefits that have already been earned. Extra payments are required each year amounting to $424 million in fiscal year (FY) 2019, and growing to $803 million in 2038. This obligation is very little different from general obligation (GO) debt, which is backed by the full faith and credit of the government. IPERS UAL debt now exceeds the total amount of GO debt owed by all governments across the State of Iowa–$7 billion vs $6.8 billion.

The PRSC should be concerned about this level of obligation, and should be trying to understand the risk. It would be irresponsible for the PRSC to ignore it. Members should appreciate that the committee is exercising the oversight with which it is charged.

“The Legislature and Governor are the plan sponsors; IPERS is the plan administrator. As Administrator, IPERS cannot make changes to the plan, or advocate for or against changes.”

FACT: While the legislature would be doing its job in evaluating IPERS, IPERS is outside its mission in actively lobbying for the status quo. The microsite is full of information about the advantages of a defined benefit plans (such as IPERS) over a certain type of defined contribution plan. The site suggests that “certain legislators and lobbyists want to explore moving public employee benefits from a defined benefit to a defined contribution plan,” and then goes on to suggest the reader contact their legislator and provides the phone number. This is clearly a grassroots advocacy endeavor in support of the status quo and in direct violation of IPERS’ own policy.

WHY IPERS IS IN THE NEWS

“The early 2000s brought the perfect storm of new mortality tables, which increased liabilities, and the dotcom recession. A contribution rate change was needed to keep IPERS healthy, but the legislature chose to delay a contribution increase, As a result, a shortfall, or unfunded actuarial liability, developed. This shortfall means that, if ALL future retirement benefits had to be paid TODAY, there wouldn’t be enough money.”

FACT: Defined benefit plans are not fundamentally flawed, but they have serious problems in a political environment. The incentives are all wrong. IPERS’ experiences over the past two decades illustrate why. Initially, benefits were enhanced in the late 1990s because the plan appeared to be fully funded. We now know that any plan that has 100 percent funding as a goal will at times be above 100 percent, and at times below 100 percent. If benefits are enhanced every time the plan is at or near 100 percent funding, the funding goal will never be met. In reality, the political environment makes it too tempting to raise benefits when the plan is close to fully funded. Doing so provides personal and political benefits, and the cost can be deferred to the future. [Read More]

IPERS is on track to close the shortfall.

“Each year contributions were underpaid meant less was available to invest, compounding the growth of the shortfall.”

This statement is true. Any time there is a shortfall, or an unfunded actuarial liability (UAL), it will grow by 7% per year unless the payments to reduce the shortfall exceed that amount. In fact, today we are not making payments large enough to offset the growth in the UAL. We are in effect growing the shortfall by design.

Recessions in the early 2000s and the Great Recession in 2009 increased the shortfall.

This statement is true. The recessions in the early 2000s, following so closely upon benefit enhancements, resulted in a decline in the funded ratio. With no action taken to close the gap, the Great Recession of 2009 had a devastating impact on the system. The portfolio lost 20% of its value practically overnight.

“IPERS REQUESTED INCREASED CONTRIBUTIONS IN 2003, BUT THE LEGISLATURE WAITED UNTIL 2006 TO TO ACT AND INCREASED THEM LESS THAN REQUESTED. CONTRIBUTION WERE UNDERPAID FOR 12 YEARS.”

FACT: This statement demonstrates the problems associated with defined benefit plans in a political environment. Now IPERS has the power to administratively raise or lower contributions by plus or minus 1%. This is an improvement in terms of fiduciary responsibility. However, recent experience (2017) shows the downside: increases in contributions will be the default solution whenever there is a significant decline in the funded ratio. Before asking taxpayers and members to pay even more, a variety of solutions should at least be explored any time a new funding gap develops.

“Pension reform in 2012 is slowly closing the gap today.”

Slowly is the operative word. Future generations of Iowans will be helping to cover the cost of benefits earned by prior generations.

The changes made in 2012 were helpful. However, one of the major changes came at the expense of shorter-term employees. The vesting period (number of years before any of the employer contribution can be kept) was stretched from 4 to 7 years. Research in Iowa by Bellwether Education Partners has shown that fewer than half of all new teachers (42.1%) make it to the vesting period. In other words, these “reforms ” mean the plan now provides no help at all with retirement security for the major of teachers.

It is also important to place the benefit savings in context. While they may have seemed significant at the time they were made, they are tiny in comparison with the total downward adjustments in the unfunded liability from 2003 to 2016.

“Iowans are living longer than ever, which increases benefits costs and must be accounted for in IPERS’ liabilities.”

FACT: Mortality tables re constantly being updated. Since IPERS was first created, the projected number of years of life after age 65 has increased by 5 years. Yet, the assumed retirement age has never been adjusted. Therefore, the cost of covering lifetime benefits has increased. Again, younger employees are having to pay for the increase in cost.

What is IPERS is doing about it?

“In 2012, four key changes were enacted to address the shortfall and close the funding gap within 30 years. The shortfall didn’t happen overnight, and it can’t be paid off overnight. IPERS is like an ocean liner; it cannot turn on a dime. But, given the opportunity to stay the course, IPERS will reach full funding.”

The single most significant thing that happened to IPERS was the 2009 market crash when the value of the entire investment portfolio dropped by 20% practically overnight. Before the crash, the plan had a 90% funded ratio, which dropped to 80% after the crash. It is now 10 years later and it is still 80% funded. Even with contributions increasing nearly 70% and benefit modifications made, it will still take 27 more years to recover, assuming all assumptions hold. Meanwhile, the plan is significantly more vulnerable should there be another downturn.

“The Iowa legislature enacted pension reform to keep IPERS healthy. This included giving IPERS (not the plan sponsors) the ability to set contributions rates and make minor adjustments swiftly.”

This change (giving IPERS the ability to set contribution rates independently) sounded like a great idea – and from a plan fiduciary standpoint it is a great idea. However, as mentioned above, there is now too much tendency to default to contribution increases without even considering other options such as benefit adjustments. Contribution rates have already risen by 66%. How high can they be tolerated?

“IPERS investment earnings fund 70% of the benefit payments. The IPERS Investment Board oversees the Trust Fund and makes adjustments as needed, such as the assumption change made in March 2017, to keep IPERS sound and secure.”

The IPERS Investment Board deserves a lot of credit for pressing to accelerate the review of assumptions rather than waiting for the normal four-year cycle as had originally been advocated by IPERS administrators. The new assumption (7% rather than 7.5% investment returns over 30 years) is more realistic. However, the change does not come without budget impact. IPERS is more sound and secure because more contributions are going into it–$100 million more each year!

“IPERS members are doing their part to keep IPERS healthy. They contribute more, have a longer vesting period, and receive less in benefits.”

The changes made in 2012 were good changes. Members should do more every time there is a significant increase in the unfunded liability. Unfortunately, this year, when the UAL went up by $1.4 billion, all of it was handled through contribution increases and none through benefit modifications.

“What’s on the horizon?” Some lawmakers and lobbyists want to explore moving public employee pensions from a defined benefit (DB) to a defined contribution (DC) plan. Changing from a DB to a DC would not eliminate the shortfall, and would make it worse in the short-term. The retirement benefits currently promised to employees will still need to be paid. Switching to a DC and barring new employees from entering the DB plan creates additional challenges to make up the shortfall.”

FACT: No one is proposing to move current members of IPERS into a DC Plan.

Placing future, new employees in a DC plan would certainly not eliminate the shortfall; however, it would contain its growth and result in less total cost over the long term. Put another way, “when you’re in a hole, the first thing to do is to stop digging. [Read More]

“IPERS is a defined benefit plan.” “Benefits are based on a formula and are guaranteed for life, no matter how the stock market performs.”

FACT: A best practice defined contribution (DC) plan can structure payouts at retirement as annuities, or payments guaranteed for life. The payments may be more or less than what would be paid under a defined benefit plan (DB), depending on how well the funds were managed and how the stock market performed over the entire period the member was active in the plan. If one is convinced the long-term return assumptions being made now are correct, then one should also assume they will also be correct for a best practice DC plan.

“401ks, 403b’s, and 457 plans are defined contribution plans.” “Benefits are portable yet unpredictable because they are based on the amount contributed and how the stock market performs.”

One of the advantages of a DC plan is that the benefits are portable. The 60% of teachers in IPERS who don’t make it 7 years (the requirement to be fully vested in the plan) forfeit all of the contributions plus interest that were made by the employer on their behalf over that period. In contrast, in a DC plan the employee is able to take with them all the contributions that were made, plus interest, and can continue to build retirement security over the course of their career. Of course, the earlier one’s saving begins, the more valuable those savings eventually become. The current plan shortchanges the majority of teachers, especially the young, mobile ones, by taking back their early career savings. In effect, those dollars end up being used to subsidize the fewer, but longest-tenured teachers whose benefits increase dramatically toward the end of their careers. [Read More]